UK Inflation, Wages and Unemployment

UK inflation, as I predicted recently, is on the rise again. On the CPI basis it has risen again to 2.5%. As the Pound once more sinks against the Dollar and the Euro, imported inflation is likely to rise even faster, in coming months. Raw material prices have risen 10.9% as against a year ago, and oil prices have risen by 50%, driven both by a rise in the global price of oil, and the fall in the Pound against the Dollar, in which global oil prices are denominated. Wages are rising at 2.7% slightly ahead of inflation, but that is likely to reverse, as inflation picks up in the next few months, as the fall in the Pound, has not yet been fully factored into prices, and that fall in the Pound continues and accelerates as a Brexit catastrophe looms larger. At the same time, the unemployment rate has fallen to the lowest level since 1975. That fact, is causing some confusion amongst pundits who wonder why it has not led to a greater rise in wages. Their confusion simply illustrates that they are tied into a short term view that only extends back a couple of decades or so. 

The comparable period in the previous long wave cycle to where we are now is the 1950's, to early 1960's. As ONS data shows, during that period, the unemployment rate varied from a low of 1.2% in 1955, to a high of 2.6% in 1963. For most of that period, it remained below or around 2%. . That is half of the current 4% unemployment rate In fact, that understates the difference, because, in the 1980's, Thatcher manipulated the way the unemployment figures are measured 20 times, so as to reduce the published figures, as her economic policies drove the economy deeper and deeper into stagnation. The real rate today, on the basis of a comparable calculation of the 1960's, would be more like 6%. So, it's no wonder, that we are not seeing falling unemployment yet, having the kind of effect seen in the 1960's, on pushing up wages and squeezing profits. But, that trend is still in place, and with Britain's appalling levels of productivity growth, and with the effects of Brexit, those effects are likely to be more dramatic when they start to be felt. 

A look at the graph of the unemployment rate also illustrates not only the progress of the long wave cycle, but also shows why the myth about prosperity during the 1980's, and 90's was just that a myth.